Money-income and credit-income relationships during the pre- and the post-liberalization periods: evidence from Malaysia

Abstract

Using the Bernanke's contemporaneous structural VAR, this paper investigates the role of money and credit in the monetary transmission mechanism during the pre- and post-liberalization periods in Malaysia. During the pre-liberalization period where credit and interest rates were regulated, the evidence supports the dominance of bank credit shocks over money shocks in explaining the output variability. After the liberalization of financial market, however, money as well as credit innovations were proven to make significant contribution to the output fluctuation.

Dynamics linkages among Money, Output, Interest Rate

“…Tan and Baharumshah (1999) found M1 and M3 appear to have significant effect on output and prices using VECM but not in M2. This contradicts with Azali and Matthews (1996) results that they present evidences of causality between money (M2) and output in the post-liberalization, money dominated credit. Thus, this paper is aiming to test on the power of M2 in predicting output to enhance latter's finding.…”

Firm-level investment and monetary policy in Malaysia: do the interest rate and broad credit channels matter?

“…Azali 1998;Azali and Matthews 1999;Ibrahim 2005;Tang 2006), and disaggregated bank-level data (Karim, Azman-Saini, and Karim 2011). None have examined the effect of monetary policy on investment.…”

Anism of Monetary Policy in Small Developing Countries: an Application to Trinidad and Tobago

“…The expected sign of these variables depends on the aims of domestic monetary policy. If, for example, the authorities are pursuing a counter cyclical policy aimed at stabilisation an increase in government expenditure is likely to be met by a restrictive monetary policy in the form of an increase in the reserve requirement (Azali and Matthews, 1999). Conversely, an increase in output may be met by a relaxation of monetary policy (especially if the economy is sluggish) and hence a reduction in the reserve requirement to facilitate a larger volume of loans.…”

“…5. There is some suggestion in the literature that current values should be preferred to constant price as it is often argued that causation runs from money to money income (see Laidler, 1978, Azali andMatthews, 1999). …”

“…Disyatat and Vongsinsirikul (2003) find bank lending and investment to be important in Thailand. In a study of Malaysia, Azali and Matthews (1999) find a dominance of bank credit shocks in the pre economic liberalisation period while both money and credit shocks play an important role post liberalisation. A similar result was found by Lopes (1998) for Brazil.…”